Oklahoma State PTC Ends for Wind Projects Not Operating Prior to July 1, 2017

On April 17, 2017, Oklahoma Governor Mary Fallin signed into law House Bill No. 2298, which moves the deadline for a wind project to be operational to qualify for the state’s production tax credit for wind power to June 30, 2017 – three and a half years earlier than the December 31, 2020 deadline under prior law. The state’s tax credit is a $0.0050 per kilowatt-hour credit for electricity generated by eligible zero-emission facilities. The credit is available for 10 years from the date the project becomes operational and is refundable for up to 85 percent of its face amount. Eligible zero-emission facilities are those located in the state that produce electricity from wind, moving water, sun or geothermal energy, and have a rated capacity of one megawatt or greater. The bill does not change the sunset date for the credit for any type of eligible facility other than wind (i.e., the end date for solar, moving water and geothermal facilities remains at January 1, 2021). In addition, all existing wind farms and those that are operational before July 1 of this year will continue to receive the 10-year production credit under the same terms as previous law.

As previously addressed in this blog by David Burton and Biyomin Koff, this early sunset date may affect Oklahoma wind projects that started construction expecting to be able to receive the state tax credits for 10 years, but cannot finish construction prior to the new July 1 deadline. See their prior coverage here and here. Burton also commented that the early sunset has caused developers to look to other states for new projects. Thus, future residents of Oklahoma will regret Oklahoma’s decision to give up its position as a leading state in wind-friendly policies, as less projects being sited in Oklahoma today means less jobs operating and maintaining wind facilities for many years to come. As Burton noted, “[t]his seems fairly short-sighted, given the jobs, property taxes and ground rent to landowners.” There is no doubt that wind projects have been important to Oklahoma’s economy, as last year it was ranked third for production in the United States, generating more than 6.6 gigawatts of installed wind capacity. [1]

To some extent, the great success of the tax credit in incentivizing development of wind power facilities in Oklahoma is also what led to the enactment of House Bill No. 2298.[2] Governor Fallin did not dispute the importance of the tax credit in attracting new business development in Oklahoma. She acknowledged the importance of the tax credit, stating: “With the support of the zero-emissions tax credit, our state has become a national leader in wind energy,” and that the “zero-emissions tax credit was key to the growth of wind energy in Oklahoma . . . .”[3] Ultimately, the state’s budget deficit of approximately $878 million for fiscal year 2018 carried the day over the voices of the bill’s critics who argued that the early repeal of the wind credit would send a bad message to other businesses that might be considering investing in Oklahoma.

The Windfall Coalition, a group formed in 2016 by oil and gas executives, argued that the wind industry was now mature enough to sustain itself without the tax credit and was diverting too many tax dollar from other needs, such as teacher pay, education, first responders and core government services. Cliff Brannan, the executive director of The Windfall Coalition, cited the great success of the program in making Oklahoma the third-largest producer of wind energy, but argued that the better-than-expected success of the tax incentive was not a good thing; the goal of the zero emissions credit was to get the state’s renewable energy production to 15 percent, and it was already between 21 and 22 percent.[4] Moreover, The Windfall Coalition claims that the zero-emission credit is expected to cost more than $170 million for 2017; well in excess of its original estimate of less than $2 million per year.[5]

In other words, the competing oil and gas industry is not happy about the success of the wind industry and has reason to emphasize the extra tax cost to the state and downplay any of the extra benefits that have accrued to Oklahoma’s citizens as a result of being such a desirable location for wind farms. According to NextEra Energy, a large wind developer with 13 operational wind farms in Oklahoma, a typical wind farm created 200 or more construction jobs, six to 10 operational jobs and tens of millions of dollars in revenue to the local government, as well as increased economic activity for local business owners. [6] The State of Oklahoma Incentive Evaluation Committee disagreed with the claims of The Windfall Coalition that it was time to end the tax subsidy. The commission argued that ending the credit now would cause construction of wind farms to slow down because the sunset was too soon. Its view was that the subsidy needed to continue through the end of 2018 in order for the technology to have reached the point where the industry could be cost competitive without the zero-emissions credit.[7]

Certainly, it would have been more fair if the state had at least applied a “start of construction” standard for the early sunset (i.e., allowed the credit for any wind projects that had started construction prior to July 1, or the date the bill was signed).[8] For example, Enel Green Power North America, a large wind developer, started construction on its ninth and largest wind project in Oklahoma on April 14. The 300 megawatt Red Dirt wind farm is expected to be operational near the end of 2017. So, while the several years of advance planning that went into this $420 million project were undertaken with the expectation of the state’s 10-year production tax credit, this will no longer be the case. The early sunset caused Enel to consider whether or not to continue going forward with the project. Enel said in a statement, “While we considered not going forward with the Red Dirt project, we are a company that honors its business and financial commitments, and therefore we are proceeding with construction.”[9] Moreover, not continuing construction would also be costly, as Enel had already invested a great deal of resources in the multiyear planning process that goes into developing a project of this size.

After signing the legislation, interestingly both Governor Fallin and House Speaker Charles McCall commented that several wind development companies had been cooperative in working with the legislature to pass House Bill 2298 because they understood that given the state’s budgetary crisis it could not sustain the cost of the tax credit.[10] Fallin has also proposed imposing a new tax on wind production at the rate of $0.05 per kilowatt. There has been no mention of whether the wind industry has perhaps negotiated some form of a horse trade related to this proposed production tax (e.g., a reduction in the rate, delay in passage or outright abandonment of the tax). At present, the proposed production tax bill does not appear to be making much headway in the legislature, but that does not mean it will not be passed.

Statements made by Jeffrey Clark, president of The Wind Coalition, suggest that there is no connection between the stalled status of the proposed wind production tax and the industry’s willingness to accept the early sunset of the zero-emissions credit. Clark said the wind industry has been working with the Oklahoma legislature since 2014 to roll back the tax incentives.[11] He described The Wind Coalition’s support for the early ending of the tax credit as needed to quell “the anti-investor rhetoric emanating from some quarters of the capitol,” because until this dies down, “industries and investors of all types and in all industries will be hesitant to step forward with new capital intensive investments. We applaud Governor Fallin and the legislative leaders who all recognize that businesses require tax and regulatory certainty and stability to succeed.”[12] Clark also praised the wind industry for being “the first and only industry to offer to phase out its incentives,” and stated that he hoped “other industries will follow the example we set.” It is also worth noting that large wind developers may also gain something from the early sunset in that their large scale projects and experience probably enable them to be cost effective without the subsidy; whereas new smaller developers may still need the tax subsidy in order to enter the market. If this is true, the early sunset helps large developers reduce competition for prime sites in Oklahoma.

This is not the end of the fight by the oil and gas industry to reduce the competitiveness of wind energy generation in the state. Immediately after Governor Fallin signed House Bill 2298, Cliff Branan, the executive director of the Windfall Coalition, commented “There is still more work to be done to ensure wind is on equal footing with other energy sources in Oklahoma, rather than draining our state’s coffers.”[13] And during that same week, the group launched an active campaign, including television ads, to get the legislature to pass the wind production tax.[14]

For now, Wyoming remains the only state that imposes a tax on wind energy production.

[2] The lobbying efforts of competing energy sources presumably contributed to the early effort, with oil and gas executives taking advantage of the budget shortfall to garner support for their position that the state was provided excessive incentives for renewable energy.

[5]Insight for Industry – Oklahoma Rolls Back Wind Incentives, Reflects Need for Economic Diversification to Address Budget Shortfalls in States Dependent on Fossil Fuel Revenue, EnerKnol (last visited Apr. 27, 2017), https://enerknol.com/early-ending-of-tax-credits-casts-uncertainty-over-oklahoma-wind-industry/. The Windfall Coalition does not mention that this $170 million cost is small in comparison to the estimated $460 million cost in fiscal year 2017 for lost tax revenue from reduced tax rates for the oil and gas industry. According to the Oklahoma Policy Institute, there have been multiple exemptions put in place over the years for the oil and gas industry, including House Bill 2562, which was enacted in 2014 and provides a permanent lowered tax rate for oil and gas wells drilled after July 1, 2015. The lower tax rate is two percent for the first 36 months, and seven percent thereafter. In addition, horizontal and deep wells drilled before July 1, 2015, have a tax rate of one percent and four percent, respectively, for the first 48 months of production. Id.

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